There is a great tendency in all levels of government to put incoming revenue into a big undifferentiated bucket, and take expenditures out without connecting source and drain in any logical way. This makes responsibility hard to define when departments or cities or states go bankrupt.
One small example of this occurred long ago in Ontario, when the MNR (Ministry of Natural Resources) was compelled to introduce fishing licenses. Apparently this cost the MNR some 17 million dollars, and brought in some 35 million dollars. However when the MNR asked for some of that revenue, it was denied. Planned program expansions died.
Cities can do the same thing but with less obvious instances. I believe that Mississauga has done this for ages: taken in development fees and used that to fund various construction and infrastructure, without considering the eventual ongoing cost of maintaining and upgrading that infrastructure. This is great so long as maintenance is low (the new suburbs are mostly new) and new development is growing.
Once development slows and infrastructure ages, the fact that the development / tax for suburbs was never balanced, suddenly makes the city’s finances look less than ideal.
I submit that this is a form of Ponzi scheme, which only works as long as more and more players can be pulled into the development.
It would appear that the world economy is in a similar situation. Governments borrow money they apparently (think of Greece, Ireland, and soon Italy, Spain, and Portugal, perhaps) can not repay except by borrowing more money. Government can spend the borrowed money on civil servant pensions, public works, et cetera and create an apparently wealthy economy. However when the music stops, and money can no longer be borrowed, the sins of the past decade or two demand payment now.
In the United States there has been a movement of manufacturing offshore. The DOHA round of trade negotiations was all about patent and copyright protection, the submission of other nations to the big few’s demands that those infringement concerns be solidly enforced by law, police, and jails. (See Information Feudalism, the book, for details on this.) This movement of the means of production of real physical wealth went largely unnoticed. On top of this, many service sector jobs – especially those involving telephone support or sales – were also outsourced across oceans.
Nevertheless US citizens seemed to be able to keep spending. How was this accomplished? by dropping interest rates and convincing significant numbers of citizens to refinance mortgages and spend the difference in monthly payments. Add in a slew of “NINJA” (No INcome, No Job, nor Assets) mortgages, and the oncoming crash was inevitable.
What nobody seems willing to say out loud (except perhaps David Olive in the Toronto Star) is, we will now pay for the fact that a lot of what we own is actually done on credit. Home foreclosures are becoming all too common.
Government and EU finance “experts” insist that the way out of this is through austerity. This is incorrect, as several economists have tried to point out. The IMF generally insisted on austerity before helping countries out in the past, and in general this made the citizens’ lives worse while killing tax revenues, jobs, and critical services. (Note that Dominique Strauss-Kahn spoke out against this practice about one week before he was famously put in jail over the weekend on serious charges, in a case that later collapsed.)
There is a catch in stimulus spending: it had better work. Once the stimulus is spent, citizens better become employed, pay taxes, and help the government pay down the debt incurred.
What if the above glib assumption is untrue? What if it is no longer possible for enough manufacturing growth, generating some foreign sales, to bring cash back into a country?
I am reminded that a technical device like an Ipod can be made abroad, then sold domestically, with the component manufacturers grossing one third of the customer price while the patent holder and distributors pocket two thirds of that same customer price. One wonders where all that lovely profit goes, since there seems to be little domestic manufacturing required. One could suspect that it goes into monstrous executive bonuses.
The system is broken. Mississauga may not be in as much trouble as I think it is, but time will tell. Europe may weather the storm of austerity, unemployment, and vast income disparity, but the demonstrations in capital cities look pretty intense. The United States may somehow coast out of this depression with austerity measures, but my personal bet is a repeat of the “dirty thirties” with long slow painful jobless no-growth years, maybe decades.
We need leaders, both corporate and political, that understand what it means to have money leave the country, leave the middle class, leave the city coffers. They need economists to suggest that balancing cash flows is the only sustainable way to manage anything. We need to revive Henry Ford’s view, that he made products his workers could buy. Note I said made, not imported, products.
We need taxes on individuals and corporations that are commanding the vast majority of the cash in the system. Those tax revenues should be building the infrastructure of the present and future, and doing it with local employment, local inputs, local corporations.
Globalization is a giveaway. Eventually an ordinary citizen, due to unemployment, will be not be able to buy an Ipad or a Blackberry, except for a privileged few, who will be forced to live in gated communities for their personal safety. Everyone else will be poor and desperate.
Stimulus is a gamble. It also appears to be the only risk with a potentially positive outcome.